Business Definition for: simple interest
simple interest
computations based only on the original principal.
compound interest
is applied to the original principal and accumulated interest. For example, $100 deposited in a savings account at 10% simple interest would yield the interest of $10 per year (10% of $100).
simple interest
interest calculation based only on the original principal amount. Simple interest contrasts with
compound interest
, which is applied to principal plus accumulated interest. For example, $100 on deposit at 12% simple interest would yield $12 per year (12% of $100). The same $100 at 12% interest compounded annually would yield $12 interest only in the first year. The second year's interest would be 12% of the first year's accumulated interest and principal of $112, or $13.44. The third year's payment would be 12% of $125.44-the second year's principal plus interest-or $15.05. For computing interest on loans, simple interest is distinguished from various methods of calculating interest on a precomputed basis.
See also
precompute
,
consumer credit protection act of 1968
simple interest
interest computed only on the principal balance, without compounding. Simple interest for a year on $100, borrowed at 8% interest, is $8. If interest is compounded daily, the finance charge is $8.33. Simple interest computation is the basis of variable rate consumer lending, and also is used widely in mortgage lending. When interest payments on loans are calculated on a simple interest basis, the borrower pays finance charges on the principal balance actually used. Interest calculated under the
add-on interest
method speeds up the rate of interest payment in the early years of a loan.
See also
compound interest
,
bank discount rate
simple interest
sum of money paid on the principal amount of money invested or loaned.
See also
interest
simple interest
method of calculating the future value of a sum assuming that interest paid is not compounded, i.e., that interest is paid only on the
principal
.
Example: An account is established paying simple interest of 10% on a principal of $1,000. Table 50 shows the current value of the account for the next 5 years.
| TABLE 50 |
|
| SIMPLE INTEREST |
|
| Year |
Value |
| 1 |
$1,100 |
| 2 |
1,200 |
| 3 |
1,300 |
| 4 |
1,400 |
| 5 |
1,500 |
See also
compound interest
simple interest
method of calculating the future value of a sum assuming that
interest
paid is not compounded, that is, interest is paid only on the principal.
See also
compound interest
Related Terms:
in installment lending, methods of charging interest whereby the total amount of annual interest either is deducted from the face amount of the loan at the time the loan proceeds are disbursed or is added to the total amount to be repaid in equal installments. In both cases, the effective rate to the borrower is higher than the stated annual rate used in the computation. "Truth in lending" laws require that the effective annual rate be expressed in simple interest terms.
landmark federal legislation establishing rules of disclosure that lenders must observe in dealings with borrowers. The act stipulates that consumers be told annual percentage rates, potential total cost, and any special loan terms. The act, enforced by the Federal Reserve Bank, is also known as the Truth in Lending Act.
rate that is applicable when interest in subsequent periods is earned not only on the original principal but also on the accumulated interest of prior periods. For example, assume that the initial principal is $1000 and annual interest rate is 10%. At the end of first year, the amount is the principal and interest, which is $1000 + .1($1000) = $1000 + $100 = $1100. At the end of second year, the amount is accumulated: $1100 + .1($1100) = $1100 + $110 = $1210.
- rate quoted by dealers for short-term noninterest bearing money market instruments, such as commercial paper and Treasury bills. When a bank accepts or agrees to pay a time draft, thus creating a banker's acceptance, the difference between what the bank pays and the face value of the instrument is the bank's charge (called a discount) for honoring the draft. The rate is the bank discount rate.
- rate that banks charge on discount loans (loans with the interest deducted when the loan is made). The borrower receives the face value of the note, less the discount. A borrower taking out a $1,000 one-year loan pays the lender $50 in interest and receives $950 for use over the year. The rate of interest is 5.263%. ($50 / $950) in this example.
- amount charged by a lender to a borrower for the use of funds. The interest rate is typically expressed on an annual basis. Interest equals principal x interest rate x period of time. For example, the interest on a $10,000, 8% loan for 9 months is: $10,000 x 8% x 9/12 = $600.
- equity ownership of an individual or other entity in a business or property expressed in percentage terms or in dollars. For example, if an investor company owns 50,000 shares of the investee company's 150,000 outstanding shares, the investor has a 331/2% ownership interest.
rate that is applicable when interest in subsequent periods is earned not only on the original principal but also on the accumulated interest of prior periods. For example, assume that the initial principal is $1000 and annual interest rate is 10%. At the end of first year, the amount is the principal and interest, which is $1000 + .1($1000) = $1000 + $100 = $1100. At the end of second year, the amount is accumulated: $1100 + .1($1100) = $1100 + $110 = $1210.
rate that is applicable when interest in subsequent periods is earned not only on the original principal but also on the accumulated interest of prior periods. For example, assume that the initial principal is $1000 and annual interest rate is 10%. At the end of first year, the amount is the principal and interest, which is $1000 + .1($1000) = $1000 + $100 = $1100. At the end of second year, the amount is accumulated: $1100 + .1($1100) = $1100 + $110 = $1210.
Referring Terms:
Copyright © 2005, 2000, 1995, 1987 by Barron's Educational Series, Inc., Reprinted by arrangement with Publisher.
Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2000, 1995, 1991, 1987 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2004, 2000, 1997, 1993, 1987, 1984 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
